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2H to see double-digit growth; EBITDA to lag

Marico Ltd. (MRCO) 2QFY25 domestic business saw some improvement in its volume trajectory (+5% YoY volume growth) driven by core as well as new franchises. Realizations have turned positive (price hikes + reversal in pricing cycle) this quarter supporting domestic revenue growth of ~8%. Incremental currency headwinds in some overseas markets restrained consolidated growth to 7.6%. Impact of inflation in domestic core portfolios was more than offset by margin improvements in domestic digital-first franchises and International businesses. Improving trajectory in domestic core, fresh price hikes in Parachute & Saffola edible oils, likely bottomingout of VAHO, continued momentum on domestic diversification and healthy CCG in International business should lead to robust revenue growth in 2HFY25 while inflationary pressure restricts EBITDA growth. Earnings change and roll-forward to FY27E EPS gives us a slightly revised target price (TP) of Rs750 (Rs745 earlier), implying an upside of ~19%. We thus upgrade our rating to BUY.

2QFY25 Result Highlights (Consolidated)

* Headline performance: Topline was up by 7.6% YoY to Rs26.6bn (vs est. Rs26.9bn). EBITDA grew by 5% YoY to Rs5.2bn (vs est. Rs5.3bn). Adjusted PAT (APAT) after MI was up ~10% YoY to Rs3.9bn (vs est. Rs4bn).

* Domestic revenues were up 8%YoY with underlying volume growth of 5% YoY. Domestic EBIT margin was down by ~70bps YoY to 19.8%. International business was up ~6.4% YoY (13% CCG) with EBIT margins up ~230bps YoY to 25.5%.

* Gross margin came in at 50.8% (+30bps YoY but -150bps QoQ; vs our est. 50%) as the impact of higher input costs in the core portfolios of the domestic business was more than offset by healthy margin improvements in the digital-first franchises in India and international businesses. Higher overheads: Employee cost up 40bps YoY, advertisement and sales promotion (A&SP) up 10bps YoY and other overheads up 30bps YoY, meant that EBITDA margin came in at 19.6% (down 50bps YoY; vs our est. 19.9%).

* 1HFY25 revenue, EBITDA & APAT were up 7.1%, 7.2% & ~11% YoY. Gross margin was up by 130bps YoY to 51.5% while EBITDA margin was flattish YoY to 21.6%.

Near term outlook: (1) Rural growing at 2x the pace of urban on a YoY basis. (2) MRCO will focus on volume led value growth while EBITDA growth might lag revenue in near term due to inflation. (3) It has implemented price hikes in Parachute Rigids (another round of ~4% increase at brand level) and Saffola Edible Oils (~15%) at the end of 2QFY25. (4) Company will try to hold EBITDA margins for FY25, at worse EBITDA margin will see a decline of ~50bps in FY25.

View & Valuation

Improving trajectory in domestic core, fresh price hikes in Parachute & Saffola edible oils, likely bottoming-out of VAHO, continued momentum on domestic diversification and healthy CCG in International business should lead to robust revenue growth in 2HFY25 while inflationary pressure restricts EBITDA growth. We are now building ~10% revenue CAGR over FY24-FY27E led by (a) Improvement in volume growth for the core portfolio along with favorable pricing cycle. (b) Consistent uptick in revenue share of Foods, Premium Personal Care (including the Digital-first portfolio) driven by innovations, step-up in market development, brand building spends and focused GTM initiatives. (c) Healthy momentum in international business. (d) Distribution expansion through Project SETU. We expect ~11% EBITDA CAGR over FY24-FY27E (~40bps EBITDA margin expansion as we expect gross margin to expand by just ~140bps). Earnings change and roll-forward to FY27E EPS gives us a slightly revised TP of Rs750 (Rs745 earlier), implying an upside of ~19%. We thus upgrade our rating to BUY.

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